managing climate risk

we integrate climate risks into strategic and business planning processes

Chevron's Enterprise Risk Management Process provides corporate oversight for identifying major risks to the corporation and ensuring mitigation plans are in place. The Process includes an annual risk review with executive management and the Board of Directors that identifies financial, operational, market, political and other risks inherent in our business. Material risks are disclosed in our regulatory filings.

Greenhouse gas (GHG) issues, climate change-related risks and carbon pricing risks are considered in Chevron’s strategy, business planning, and risk management tools and processes. When assessing the business risk posed by a carbon restricted world, Chevron considers the world’s energy demand, the role fossil fuels play in providing that energy, the evolution of energy and climate policies, advancement of energy and climate policies and advancement of new energy technologies. In view of the continuing global demand for oil and gas, the substantial future investment required to meet that demand, and the way investment decisions to explore for and/or develop resources are phased and made with a market view in mind, the risk exposure to current assets and capital investments in such a restrictive GHG scenario is minimal. Chevron is well positioned to provide affordable energy now and into the future.

Learn more about these issues and how Chevron manages and discloses climate-related risks below.

The world’s energy demand is growing, driven by the emerging middle class.

Reliable and affordable energy is necessary for improving standards of living, expanding the middle class and lifting people out of poverty in developing nations as well as maintaining strong economies and quality of life in the developed world. In its “New Policies” scenario, the International Energy Agency1 (IEA) would expect energy demand to grow 32 percent by 2040 (from 2013), driven by the population, demographics (increased working age population) and rising wealth in the developing world.

Demand for fossil fuel-based energy remains significant even in a carbon-restricted scenario.

Driven, in part, by the long-lived nature of the world's transportation and electricity infrastructure, in the "New Policies" scenario, the IEA would anticipate fossil fuel's share of the world energy mix to be 75 percent with renewables making up 14 percent in 2040. The combined market share of oil and natural gas remains relatively constant in this scenario at approximately 50 percent.

If carbon dioxide emissions are restricted by policy, global demand for petroleum and natural gas will remain significant given their respective advantages in transportation and power generation. Petroleum-based transportation fuels have advantages of energy density, affordability, storage and availability at scale. In power generation, one of the advantages of natural gas comes from its reduced CO2 emissions intensity, which is about half the CO2 per unit of power produced through coal-fired generation. These factors support resilience of oil demand and growth in natural gas demand even in a world which restricts CO2 emissions.

The IEA further analyzed the sensitivity of energy demand in their scenarios to regulation that restricts CO2 emissions; this additional “450 Scenario” constrains fossil fuel energy use to restrict atmospheric CO2 (equivalent) concentrations to 450 parts per million (ppm). Even in this scenario, by 2040:

natural gas demand grows about 15 percent from 2013 to 394 billion cubic feet per day while coal demand decreases about 36 percent to 9.8 million metric tons per day

combined, oil and gas supply about 44 percent of world energy mix.

To produce oil and gas at the demand levels indicated in the "450 Scenario" will require investment on the order of $12 trillion through 2035, as inferred from IEA analysis. This investment will be required both to address natural field decline, estimated at approximately 15 percent per year, and to bring new resources onto production to meet demand. To maintain this level of oil supply, an additional 40 million barrels per day of new oil and natural gas liquids production will be needed by 2035. The IEA notes that "the policies in the 450 Scenario do not introduce significant new risks that currently-producing oil or gas fields will be forced out of operation."1

There are significant distinctions between oil, gas and coal reserves, in addition to distinctions in their respective ownership, reserve life (the ratio of proved reserves to annual production) and risks under stringent climate policies. The embedded carbon within proven fossil fuel reserves comes 63 percent from coal reserves, 22 percent oil and 15 percent natural gas. With respect to oil and gas reserves, 90–95 percent is owned by national oil companies, with the balance owned by private firms. OPEC has an average 90-year reserve life and controls 72 percent of the world's remaining oil reserves.2

By contrast, Chevron has an approximate 12-year reserve life based on proven oil-equivalent reserves and annual oil-equivalent production at year-end 2015.

The risk exposure to current assets and capital investments in a carbon- restricted scenario is therefore minimal in view of:

the continuing global demand for oil and gas

the substantial future investment required to meet that demand

the reserve life of Chevron's reserve base relative to that of a national oil company

our investment decisions to explore for and/or develop resources that are phased and made with a market view in mind.

1 Redrawing the Energy-Climate Map (2013). Copyright by the OECD/IEA

2 Bernstein Research. “The Very Long View: How Will ‘Global Warming’ Affect the Oil & Gas Industry?” June 2013

The culmination of the December 2015 United Nations Climate Change Conference (COP 21) in the Paris Agreement represents global engagement on the issue of climate change and establishes a framework on how this issue will be addressed going forward.

There are foundational elements of the Paris Agreement that are aligned with Chevron’s Policy Principles for Addressing Climate Change, such as global engagement, recognition of the need for actions in both emissions reduction ("mitigation" in UN terminology) and adaptation, and the call for transparent policies. A number of key aspects of the Paris Agreement, however, remain undetermined and will be addressed in future UN negotiations and by individual governments. As governments further consider the specific policies and implementation actions to pursue to achieve their goals, Chevron remains committed to working with policymakers to inform specific policy proposals.

As nations advance their GHG policy goals, it is important for governments around the world to consider how quality of life, economic growth, and environmental policy are inextricably linked.

Climate change represents one of many issues managed through our existing risk management tools and processes, which include an annual review by our Board. Material risks are disclosed in our regulatory filings.

Chevron utilizes comprehensive risk management systems to assess potential weather-related and physical risks to our assets and ensure their resiliency. Capital investment reviews and decisions involve uncertainty analysis, which incorporates potential ranges of storm severity and frequency, air and water temperature, precipitation, fresh water access and wind speed, among other factors.

United States securities laws require companies to disclose in annual and quarterly reports filed with the SEC the risks related to climate change that could materially impact the company, including a company's financial condition and/or results of operations. This includes disclosure of the direct or indirect impact of regulation, business trends, and physical consequences related to climate change. Chevron complies with this requirement. See the 2015 10-K filing.

As a premier developer of energy resources with a focus on capital efficiency, Chevron will play a prominent role in meeting global energy demand. Based on our experience and portfolio, which includes significant reserves and investment in natural gas, Chevron is well-positioned to deliver affordable energy now and in the future as energy and climate policies evolve.

Chevron's prominent role in meeting global energy demand is ensured by our strong queue of opportunities, our disciplined approach to capital allocation, portfolio management, decision making and risk management—the hallmarks of a premier developer and operator. Energy development and production decisions are made with a clear view to the future.

Given our capital discipline; a portfolio that includes significant reserves and investment in natural gas; and our knowledge and experience with emerging energy technologies, Chevron is well-positioned to provide affordable energy now and into the future.

making significant investments in two of the world's largest CO2 storage projects

conducting advanced biofuels research

making investments in projects that will reduce our greenhouse gas emissions from flaring and venting.

Two investments in flaring reduction projects in our upstream operations began to pay off in 2015. The first is in our Nigeria/Mid-Africa business unit where we commenced operation of the Escravos Gas Plant (EGP) Phase 3B, which will reduce flaring from eight offshore production platforms. In addition, our Southern Africa strategic business unit completed the Nemba Enhanced Secondary Recovery Project, which will reduce our flaring in Angola.

These actions span all phases of technology development from research to demonstration and deployment. Together, this ensures Chevron will have the institutional knowledge and organizational capability to meet future energy requirements and take advantage of alternatives as they mature in terms of cost and scale.

Growth in natural gas production

IEA studies referenced above indicate significant ongoing demand for both oil and natural gas to meet global energy needs. Particularly noteworthy is the growth in demand for natural gas in both their primary demand and 450 Scenarios. Natural gas is a growing part of Chevron's portfolio—in 2015, gas was 33 percent of our total oil and equivalent gas production. 2015 year-end proved gas reserves were 44 percent of our total oil and gas reserves. We expect our gas production to grow in coming years reflecting our reserves position, which is a reflection of our increasing gas investments around the world.

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